Here’s Why David Einhorn is Wrong on SunEdison, Inc. (NYSE:SUNE)

By Palwasha Saaim, B.Sc Published : October 5, 2015

Is SunEdison, Inc. (NYSE:SUNE) a $2.50 Stock? Maybe.

Investment guru David Einhorn’s hedge fund Greenlight Capital is losing big money—down by almost 17% this year alone, showing the worst performance since the Great Recession seven years ago. Hedgies are definitely not super humans and often make wrong picks. But what was certainly not expected from a hedge fund manager of Einhorn’s stature is utter oblivion to one investment’s obvious financial shenanigans.

Four of Einhorn’s top holdings, including Apple, Inc. (NASDAQ:AAPL), SunEdison, Inc. (NYSE:SUNE), Consol EnergyInc. (NYSE:CNX), and Micron Technology, Inc. (NYSE:MU) have tanked. The bane of his success, however, has been the SUNE stock, a miscalculated solar energy investment that has plummeted over 63% year-to-date.

Einhorn wagered on the Incentive Distribution Rights (IDRs) given by TerraForm to SunEdison. These IDRs allowed SunEdison to keep receiving hefty dividends from TerraForm. Now, the two TerraForms, TerraForm Power, Inc. (NASDAQ:TERP) and TerraForm Global, Inc. (NASDAQ:GLBL), are actually two “yieldcos”created by SunEdison as entities separate from the parent but having SUNE’s controlling interests. In other words, these are just extensions of SunEdison built somewhat like a financial special purpose vehicle (SPV). And we all know how SPVs have historically fared.

The SPV-like structure allows companies to hide debt by making the relationship between the parent and subsidiary SPVs very obscure. Simply put, management does it to separate risky investments of the parent from the SPV, so if the parent crashes, the SPV can still hold up. The point missing here is that essentially the subsidiaries are affected by the operations of the parent—a losing parent should ultimately mean a losing SPV in terms of margins.

Giant failures like Lehman Brothers used such ploys to financially engineer their earnings figures, painting a rosy picture of the company to shareholders. The result? The companies failed, the shareholders lost, and the executives made money and walked free.

SunEdison is the Next Enron

A “yieldco” is essentially a publicly traded company, an extension of the parent company, separated to form a less volatile investment with high dividend yield. Yieldcos are used by companies to finance large projects and acquisitions. Note here that only one of the two SUNE yieldcos pays dividend, and the SUNE management has been using these yieldcos to make unprofitable acquisitions right and left and in the process, racking up some massive long-term debt. SunEdison has also been partnering with TerraFrom to receive huge syndicated loans. (Source: SunEdison and TerraForm Power Announce Successful Syndication of $280 Million TerraForm Private Warehouse Debt Facility, TerraForm Power, August 12, 2015.)

The two yieldcos were taken public in overpriced IPOs raising millions for the company. But both have slumped over 50% from their opening prices. Fundamentally, both the yieldcos have negative profit margins, negative returns to equity, and high debt burden just like SUNE.